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Daily analysis 14.10.2016

, author:

Marcin Lipka

The pound remains at a record low level. This afternoon’s main events are the American retail sales data and Janet Yellen’s testimony. The zloty remains stable. However, the strengthening of the Polish currency is possible if the signals from abroad decrease pressure for rate hikes in the USA.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • 14.30: Retail sales from the USA (estimations: positive 0.6% m/m; excluding fuel and cars: positive 0.3% m/m).
  • 14.30: Production prices from the USA, excluding food and fuel (estimations: positive 1.2% y/y).
  • 14.30: Consumer sentiment index from the University of Michigan (estimations: 91.8 points).
  • 19.30: Janet Yellen’s testimony.

Pound’s long-term minimum

The Bank of England announced that the pound is at its lowest level against the currencies included in the British trade exchange since at least 1990 (this is the year in which the oldest data regarding this matter was published.) On the other hand, The Financial Times wrote that the pound is the weakest against the basket in 168 years.

Regardless of the point of view, it’s clear that the pound is very weak. It’s most recent overvalue is a derivative of statements from the British government representatives. Theresa May and her associates have clearly suggested that decreasing immigration is more significant for them than access to the EU market. Statements from foreign officials are also not positive for the pound.

Foreign media wrote a lot about yesterday’s comments from Donald Tusk. The Financial Times, as well as Reuters, took note that the European Council chairman said, “the only alternative for hard Brexit is no Brexit at all.” This suggests that the European Union will not agree on any compromises regarding immigration, as well as the United Kingdom paying fees for the common budget.

Problems may increase within the United Kingdom as well. Nicola Sturgeon demands a referendum regarding Scotland remaining within the UK. The Scottish National Party chairwoman claims that the situation has changed after Brexit. Therefore, Scots should have a right to make a decision regarding their independence. Sturgeon also reminded that Scots voted 62% vs 38% in favor of remaining within the EU.

On the other hand, the London Court will decide whether Theresa May’s government has the right to activate Article 50, or if it needs to be activated by Parliament. If the result is favorable for the parliament, it would support the pound in the short-term. However, regardless of the court’s verdict, both parties would most likely appeal against it to the Supreme Court.

There’s still many elements which cause the pound to remain sensitive. In the end, we must not forget a huge current account deficit. The current depreciation of the pound may partially decrease the imbalance of the trade account. However, this is a long-term process that probably won’t only require a better competitiveness of export, but also will require limits on import. Taking all of these dangers into consideration, the fundamental situation of the pound remains unfavorable. It remains more likely that we will see a new minimum on the pound, rather than state that the worst is already behind the GBP.

Signals from USA

Today, the global market will mostly focus on retail sales data from the USA. Economists assume that the index (excluding fuel and cars) will grow by 0.3% m/m after a 0.1% depreciation last month. Basically, this is the last significant data included in the GDP for the third quarter. Currently, the GDPNow by Atlanta’s Fed shows a 2.1% q/q increase in annualized interpretation.

Janet Yellen’s testimony today should also be important. It’s scheduled for 19.30 (7.30 PM) in Boston. Due to the fact that the recent strengthening of the dollar has been confirmed by the debt market as well, the chances for a wear-off of the USD is quite limited. This could only be caused by the retail sales data near zero and a dovish testimony from Yellen.

Zloty remains relatively stable

There’s not much going on with the Polish currency. It remains weak, but any changes are relatively limited. The EUR/PLN went slightly below 4.29 this morning. However, it managed to return to nearly 4.30 before noon. It seems that this limited range is the base case scenario by the current global situation.

On the other hand, we may observe larger volatility on the USD/PLN. This is because this pair is more susceptible to American data. If the readings from the United States are consistent with the consensus or better, the dollar may increase to the level of 3.92. On the other hand, worse data, as well as Yellen’s dovish testimony, the USD/PLN would return to the range of 3.87-3.88.

 

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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